Question

3. Consider a monopolist facing two customer groups. The first has demand q1 = 50−2p1 and the second has demand q2 = 60−p2. The firm has marginal cost MC(q) = q, where q = q1 +q2 is the total amount sold.

1. (a) Suppose it could first degree price discriminate and charge the full willingness to pay for every unit. How many units does it sell to each group?

2. (b) Suppose it can separate customers into the two groups (third degree price discrimination), each with its own price per unit. How many units does it sell to each group? At what prices?

3. (c) Suppose instead of MC(q) = q , the firm had exactly 16 units to sell to the two groups (and no costs to worry about; the 16 units are already produced). How should it split the units between the groups?

Answer 1

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Part C)

(0, 60) demand curve of group2 50 (0, 25) demand curve of aroup 1 (60, 0) 50 (50, 0)

Now since demand curve of group 2 lies above dd curve of group 1, so at any output level, price charged from group 2 is always higher, so allocate all 16 units to group 2, for maximum benefit